Marc D. Halley

At a Glance

The "hospital of choice" for independent physicians will have the following characteristics:

  • Adequate capital for investment in human resources, technology, and facilities     
  • A strong and sustainable market position based on affiliated primary care practices     
  • The ability to engage physicians as business partners     
  • The availability of performance management information  

Hospitals depend on their medical staff members to facilitate the patient "referral path," which is also the capital generation path. Without its medical staff, a hospital is merely a purveyor of beds and ancillary services-many of which are increasingly available in ambulatory settings. The essential-although sometimes contentious-relationship between hospital executives and medical staff members is changing dramatically. Medical staff members are increasingly becoming employees of community hospitals. This trend is here to stay, driven by a variety of factors, including young physicians seeking employment rather than independence and entrepreneurship, as well as concerns about healthcare reform.

Although often downplayed by hospital administration, these new employment relationships have significant implications for independent physicians-both primary care and specialists. Referral relationships can change rapidly as employed physicians recognize their affiliated hospital as the source of their capital and as providers align to manage risk.

Successful hospitalist programs have reduced or eliminated the need for primary care physicians to actively participate in the hospital setting-exacerbating the referral management challenge. Primary care physicians no longer frequent the hospital floors or the medical staff lounge where they used to naturally run into specialty physicians and hospital executives. Rather than face-to-face interactions, relationships have become digitized and efficient-and vulnerable.

Some independent medical staff members have become competitors, owning ambulatory surgery centers and other limited services providers to maintain practice viability. Concerns expressed by hospital administration and nonparticipating physicians about "cherry-picking" for payment purposes damages an already fragile medical staff ecosystem.

Last, but certainly not least, is the influence of healthcare reform, driving pay for performance, shared risk, and bundled payments. The cottage industry comprising solo or small group practices is inconsistent with the concepts of accountable care. The costs alone of purchasing and maintaining an electronic health record (EHR) are beyond prohibitive for many solo and small group practices. The risks of aligning or being "left out" loom large for most independent physicians. Large independent medical groups can potentially respond to the challenges created by healthcare reform if they have access to capital, are governed effectively, and possess the managerial expertise required.

Why Worry the Hospital CFO?

Hospital CFOs ("chief performance officers") should be increasingly concerned about the success of individual medical staff members and practices for several reasons.

Conflicts of interest. To survive, independent physicians have taken advantage of new technologies and added ancillary services to their practices. Many of those services used to be available only in hospital settings. Other physicians have participated in the development of ambulatory surgery centers, diagnostic imaging centers, and more. These entrepreneurs are often still essential to hospital service lines and medical staffs, but compete for these ancillary revenues-with the advantage of being able to direct patients to facilities they own. Unfortunately, in their effort to survive and prosper, these entrepreneurs hurt hospital revenues.

Primary care-market share. Many hospitals would be unable to survive on the market share captured only in their hospital-owned practices. Independent primary care physicians are still a significant part of many hospitals' direct admissions, as well as indirect admissions through specialty referrals. Each full-time primary care physician captures and services 2,000 to 5,000 lives, and most patients remain dependent on their primary care physicians to know when they need ancillary services and specialty physicians.a  

Specialty services and service lines. Many hospitals would be unable to employ the full cadre of specialists required to attract primary care referrals and to ensure the required spectrum of services to meet community need. In addition, the presence of independent specialists maintains that entrepreneurial spirit to compete for primary care referrals. The referral path to specialists and on to the hospital is also the capital generation path-a concern to all finance officers who realize that the hospital is the capital-generating engine for the community healthcare system.b  

Vulnerability. Sustainable independent practice requires capital, new physician partners, new and replacement technology, and administrative expertise not normally available in solo or small group settings. These realities make independent practices vulnerable to acquisition by astute competing hospitals with large checkbooks-threatening the two preceding points.

Healthcare reform. Aligning incentives and rewards among independent physicians to effectively manage risk proved to be a significant challenge during integration efforts in the 1990s. The same challenge will occur under accountable care-even with a common EHR. Agreeing on quality standards (many of which will, unfortunately, be set by payers), transparency in demonstrating or reporting individual performance, process-improvement efforts, and more will present alignment challenges for providers all along the continuum of care.

What to Do?

C-suite hospital executives need to be aware of the challenges facing independent medical practice, as well as the status of practices affiliated with the hospital's medical staff. We often refer to the hospital CEO as the "market manager," with responsibility to ensure adequate numbers of successful primary care physicians linked to adequate numbers and selection of specialty physicians, as well as top-notch hospital service lines and ancillary offerings. In reality, the CEO cannot bear this burden alone. All senior executives, medical staff leaders, practice liaisons, and others need to become actively engaged in maintaining relationships with community physicians and look for opportunities to support their continued success. Hospitals should develop multiple "plugs" for independent physicians to link with the integrated system, depending on their particular needs, wants, and priorities-which change over time due to both internal and external factors.c  

The "hospital of choice" for independent physicians will offer the following advantages.

Source of capital. Medical practices do not generate capital. Even the largest independent practices often use debt to finance their capital needs. The hospital is the capital-generating engine for the healthcare community. Its capital provides facilities, maintains and enhances technology, supports physician recruitment, cares for the poor, and is a major employer. The vitality of the community healthcare system (both providers and recipients of care) is a function of the health of its hospital(s).

By amassing capital and appropriately investing to maintain and enhance the community healthcare delivery system, the hospital helps ensure the success of medical practices (both independent and hospital-owned). The capital ensures that high-quality services are available locally. Primary care physicians can confidently refer to a cadre of high-quality specialists and to the local hospital-keeping revenues and the resulting capital in the community to be reinvested. Without adequate capital and appropriate investment, the healthcare community will experience a downward spiral. Facilities, technology, and practices will age over time, ultimately affecting access and quality-and the sustainability of independent practices.

Growth. The key to success, now and in the future, is growing market share. Yes, enhancing revenues through additional services, higher productivity, increased fees, improved contracting, payer mix management, effective coding, and optimizing the revenue cycle will certainly provide additional revenues and generate capital. Ultimately, however, growth in market share will provide the greatest opportunity for medical practices and hospitals to prosper-despite the challenges of lower payment, more regulation, and the risk associated with healthcare reform.

Working with physicians to grow market share in primary care practices (both independent and employed physicians) and to attract that market share to specialists and service lines of choice is essential to the survival and prosperity of all-including the communities served. Local, effectively integrated delivery systems that provide convenient access to neighborhoods through sustainable employed and independent primary care practices will capture and maintain market share in their primary service areas and make inroads into their secondary service areas. Regional medical centers will look to strengthen relationships with community hospitals and their affiliated physicians. As market share grows, so will the opportunities for specialty physicians (independent and otherwise) to prosper, including participating in hospital "big-box" locations (e.g., ambulatory care centers with expanded ancillary and specialty services strategically located throughout a primary service area), which support the neighborhoods.

Business partnerships. Viewing and engaging physicians as business partners in the development and implementation of integration strategies is essential for the success of individual practices, individual service lines, and the communities served. Hospitals should engage practicing physicians in legitimate leadership roles in service line development to drive enhanced clinical effectiveness, to ensure consistent service quality, and to optimize efficiency. They should look for opportunities to joint venture with independent physicians on projects that grow the market share pie for all parties to the benefit of the communities served.

The hospital's physician recruitment and retention engine should be fine-tuned to support the growth of private practices through innovative recruitment models. (Because it is so difficult for private practices to recruit new physicians, some hospitals successfully place employed physicians and independent physicians in the same practices under appropriate contractual arrangements.) Employed primary care physicians should be encouraged to refer to affiliated independent specialists as well as those who are employed.

Performance measurement. Finance officers have a significant responsibility to ensure that accurate and timely information necessary to measure performance and drive performance improvement is readily available to support initiatives around clinical quality, service quality, productivity, operational process improvement, and financial viability.

The commitment required for a CFO to become a "chief performance officer" is perhaps summed up best in the following pledge:

"I promise to acknowledge the differences in the principles for success in each of the varied business units constituting our system of integrated delivery. I will proactively provide timely and accurate performance management information to our increasingly diverse business units in their own context to promote useful action, the results of which are measured in support of weekly accountability to achieve the desired outcome."

The more performance information is available to all members of the integrated system, including independent physicians who use the hospital, the more effective will be their performance. (Remember, anything we measure improves.) In an era of risk and reform, data availability and transparency are critical to the success of individual practices and departments that make up the integrated delivery system.

Becoming a "Hospital of Choice"

Although many physicians and practices still prefer their independence, of necessity, most will become increasingly integrated with their local hospitals and health systems. The fundamentals driving this integration trend are here to stay and will force physician-hospital alignment over the long term. The key to success in this time of transition is to be the hospital of choice, which includes adequate capital for investment in human resources, technology, and facilities; a strong and sustainable market position based on affiliated primary care practices; the ability to engage physicians as business partners with a variety of "plugs" or options; and the availability of performance management information. CFOs/chief performance officers and other senior executives have a critical role in achieving this hospital of choice status.

Marc D. Halley is president and CEO, The Halley Consulting Group, Westerville, Ohio, and a member of HFMA's Northwest Ohio Chapter ( 


a. Halley, Marc D., The Primary Care-Market Share Connection: How Hospitals Achieve Competitive Advantage, Chicago: Health Administration Press, 2007, p. xi.

b. Halley, Marc D., Owning Medical Practices: Best Practices for Sustainable Results, Chicago: AHA Press, 2011, pp. 9-10.

c. Halley, Marc D., Owning Medical Practices: Best Practices for Sustainable Results, Chicago: AHA Press, 2011, pp. 66-68.

Publication Date: Thursday, March 01, 2012

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